Law For Small Business (Management 349)

1. Law For Small Business (Management 349) Buying a Business (Chapter 10) Professor Charles H. Smith Fall 2011

2. Finding a Business to Buy • Background – what is your education, training and/or experience? • Interests – do something you like! • Is the business capable of making the amount of money you want/need? • Is a business in your chosen field available? • Can you afford to buy the business? • Ethical concerns – is the type of business consistent with your beliefs?

3. Business Structure • Best to purchase assets only; purchase of the business’ debts might “open a can of worms” – see examples on page 167. • When should you consider purchasing corporate stock or a LLC interest instead of just assets? • If the owner/seller insists and appraisal warrants it. • If corporation or LLC has an asset that belongs to the business entity and cannot be assigned; e.g., office lease or other contract with “non-assignment” clause.

4. “The Truth is Out There” • Sources of truth (e.g., financial status, productivity, legal issues) re the business you want to buy – seller, current or former employees, competitors, vendors. • Confidentiality may be necessary (e.g., trade secrets or just natural reluctance to disclose information) – see “sample confidentiality letter” on page 169. • Appraisal and/or other review by experts; e.g., CPA, attorney, someone with expertise in specific type of business.

5. How to Set a Value for a Business • Determine exactly what you are buying – note that “goodwill” may leave along with the seller, so be cautious about giving goodwill much value. • Review business’ books and records; e.g., tax returns and other financial documents, leases and other contracts, intellectual property documents – absence of documents may be a “red flag.” • Have an expert (e.g., CPA) appraise the value of the business; you may not have the expertise or the objectivity to do it properly.

6. Other “Red Flag” Items • Title – make sure the seller owns what he or she is purporting to sell. • Litigation – any pending or threatened lawsuits? Find out the facts/reasons re any litigation; don’t be placated by seller’s claim that threatened or pending lawsuit is “frivolous.” • Leases and other contracts. • Ownership of intellectual property (e.g., business or someone/thing else). • Zoning issues. • “Scuttlebutt” – information/opinions from 3rd parties like current or former employees, competitors, vendors.

7. Letter of Intent to Purchase • Simply a letter from the buyer to the seller indicating continuing – and serious – interest in buying the business. • Be careful to avoid making a firm commitment which could be interpreted as a contract; perhaps specify this is “agreement to agree” (which is not a contract). • Example on page 176.

8. Purchase-Sale Agreement – What to Include? • Names of seller, buyer and business. • Brief background information/description of seller, buyer and business. • What is being sold. • [If asset sale] Purchase price and allocation of same re each asset being sold. • Covenant not to compete – reasonable restrictions on seller re time and geography permissible in purchase-sale agreement; this is an exception to the usual prohibition under California law.

9. Purchase-Sale Agreement cont. • Provision for slight adjustments based on final inventory. • Terms of payment – refer to and attach copy of related promissory note re payment if applicable. • Inventory/work in progress. • Accounts receivable. • Bulk sales law compliance – Commercial Code § 6101 et seq. • Seller to be consultant to buyer – good for continuity and retention of goodwill though be careful for abuses since seller no longer spending own money.